LONDON - Hundreds of thousands of British homeowners face the prospect of rising mortgage rates after the country's borrowing costs soared.

Big business bank Virgin Money raised its new two- and five-year fixed-rate mortgages by 0.2% on Monday, with similar increases on its partial remortgage deals.

"The market has become less optimistic about the pace and magnitude of potential declines in base rates this year," David Hollingworth, associate director at L&C Mortgages, told CNBC via email.

He added: "Although interest rates are still expected to fall, the smaller improvement and the possibility of further extension have led to fixed mortgage rates rising."

Mortgage lenders are expected to lower borrowing costs this year while easing interest rates. But worries about the country's economic outlook have led to a sell-off in British government bonds, also known as gilts, pushing down those expectations and suggesting borrowing costs may remain elevated for longer.

UK 10-year government bond yields hovered around 4.88% on Tuesday, continuing to move higher after reaching their highest level since 2008 last week.

According to an LSEG poll, markets currently price a 62% chance of a 25 basis point rate cut by the Bank of England at its next meeting in March. However, the prospects beyond this point are less clear.

Matt Smith, mortgage expert at property portal Rightmove, said by email: "The short-term impact is that mortgage rates are likely to rise as higher borrowing costs impact lenders."

That could hit hundreds of thousands of borrowers whose current deals - including those secured five years ago when interest rates were ultra-low - are set to expire this year. As a result, Hollingworth advises borrowers to settle on a new rate immediately before further increases, with the option to reconsider the rate before completion if conditions improve.

Meanwhile, Rightmove's Smith said property transaction volumes are expected to rise, particularly as buyers seek to get a head start ahead of an imminent rise in stamp duty land tax, and lenders are likely to retain more favorable borrowing costs, at least in the short term in this way.

Smith noted: “Despite the increased costs, we are at the start of what is traditionally the busiest period of the year for the property market, so I expect lenders will still want to capitalize on this demand by offering rates as attractive as possible.”

Higher mortgage rates will also have a knock-on effect on house prices, with property portal Zoopla warning that higher rates in the longer term could alter its 2025 price growth forecasts.

"Our forecast of 2.5% home price growth in 2025 assumes an average mortgage rate of 4.5%. Any mortgage rate below 5% is consistent with low single-digit home price inflation," Downer said via email.

The average interest rate for a five-year fixed mortgage with a loan-to-value (LTV) of 75% increased to 4.4% by the end of 2024, up from 4.1% in October last year, according to Zoopla.

Rightmove data shows the average five-year fixed rate was hovering around 4.82% as of January 14.

"If mortgage rates move higher, then prices will return to uniformity and there is a risk of modest price declines in the single digits," Donnell said.

House sellers in England and Wales posted their lowest returns in more than a decade last year, latest data showed on Monday, the second year in a row that cash profits have fallen since the market peaked in 2022.

As the market cools, sellers will make an average gross profit of 42% in 2024, down from around 55% in 2022 and 60% in 2016, according to national real estate agency Hamptons.